The Federal Reserve and Federal Coronavirus Efforts

On March 3, 2020 the Federal Reserve lowered the interest rate it controls by 0.5 %.  This rate is the rate at which banks lend money to each other for short terms.

Rates are already near historic lows.  The rate on the 10 year Treasury bond is slightly below 1% per year.  Does this make sense when inflation is at 2% or slightly higher?  If you invest in a 10 year Treasury you are almost guaranteed to lose money.

These rates are manipulated by our Central Bank, i.e. Federal Reserve, in an effort to manage our economy.    One reason income inequality might be rising (it isn’t as certain as some believe, but it probably is) is that these artificially low rates force savers to invest in riskier assets such as the stock market.  Thus, the stock market has risen for 10 years partly because of an easy money policy by the Fed.

If I were the Fed I would gradually raise rates to above the inflation rate so that there is a positive return for investors.  But wait; isn’t there something wrong with this picture of the Fed or this author determining interest rates?

The economist Friedrich Hayek pointed out the “fatal conceit” of one person or bureaucracy setting prices or indeed economic policy because they could not possibly have all the information necessary to make intelligent decisions.  My take on the appropriate interest rate and that of the Fed might be equally erroneous.  The only way to get the proper rate is for the marketplace to decide, because that takes into account the vast information held by all the participants.

So let us abolish the Fed’s rate setting ability and let market forces determine interest rates.  I suspect this will remove one factor driving increased income inequality.

N.B.: Later in March the Federal Reserve lowered rates even more.

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The other big topic in the news is the coronavirus.  The topic is related to the Federal Reserve because the Fed lowered rates in response to stock market swoons caused by fears of effects from the virus.

The Trump Administration initially proposed spending an additional $2.5 billion on Federal agencies such as the Center for Disease Control and the National Institutes of Health.  This proposal has been ridiculed by Democrats and the bidding is now up to many times that in new spending.

How can anyone oppose such funding?  I can, for several reasons.  One, who knows what the proper amount of spending should be?  Politicians are throwing out big numbers as a form of virtue signaling.  Secondly, the United States cannot possibly survive on its present spending path, mainly because of entitlement spending.  So, where are the cuts in other parts of the budget to make this new spending feasible?

The next reason might be hard to hear, especially for believers in government, but special interest groups are heavily involved in the healthcare agencies.  This is true for these agencies as it is for the Pentagon.  Every single department, bureau and agency is chock full of interest group spending and we must cut spending everywhere because our nation is truly insolvent.

I do not rely on the Federal government to help us.  I rely on money-seeking capitalists to come up with better drugs and vaccines in response to their motivation to make money.

I heard the other night from one of my tennis partners that President Trump decimated the budgets for the healthcare agencies.  I suspected this was one of those accusations needing a fact check.  I looked it up when I got home and a fact check revealed that Trump proposed cuts to NIH and the CDC but bipartisan majorities in Congress prevailed and gave large increases to these agencies during every year of President Trump’s presidency.

Conclusion

Let markets set interest rates and don’t believe everything you hear from government agencies seeking money.